World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Tuesday, June 14, 2011

Stocks are higher on still weak economic data this morning. The dollar is lower, bonds are lower, oil is higher, gold & silver are up, and food commodities are mostly lower.

The market is shooting higher this morning, choosing once again to pretend that weak economic news is good news. Of course we know that the market was oversold and looking to bounce, the ever sloshing hot money just has to look for something to do, all of yesterday’s ridiculous and superfluous M&A activity is a shining bubble example.

Let’s start with the NFIB Small Business Optimism Index. It seems small business owners are not very optimistic at all, as this index fell for the third straight month, landing on 90.2 in June from 91.2 in May. Here’s Econoday acting shocked that small businesses don’t see economic recovery – and I say no kidding, just look at all the trillions thrown at too big to fail businesses while the small guys and middle-class are left to foot the bill:

HighlightsYou would never know the economy is in recovery based on reports from the National Federation of Independent Business whose small business optimism index continues to move south, down three tenths in May to a recessionary level of 90.9. The report points to weak consumer spending as the main factor, one that's hitting services which is a central sector to small businesses. The report has a sharp political tone saying, without much detail, that Washington policies aren't encouraging small businesses to hire. The report's job creation indications are deteriorating with capital spending and inventory plans weakening. One in four respondents say weak sales are their top problem. Inflation is also cited as a major concern.

Here’s the entire report below. Again, weak consumer spending and also weak services which is counter to other, perhaps more manipulated statistics:

The PPI is slowing rapidly now that oil has backed off. Rising .2% in May, this is down sharply from the .8% month to month rise in April, still high, but decelerating. PPI less food & energy left the ‘core’ also at .2%. While the market may like this reading today, all I can say is that the reading went sky high with the money pumping and is now creating a brand new trend that is very obvious – namely that increase in prices is falling off rapidly as we face the prospect of ending the flow of hot money. In other words, without the hot money we can swing very rapidly from inflation to deflation as the deflationary forces of debt saturation are extremely powerful. Here’s Econoday, as the year over year PPI chart shows, overall inflation is still quite high:

HighlightsAt the producer level, inflation slowed but there were still f hot spots in the data. Overall PPI inflation in May softened to 0.2 percent from April's 0.8 percent jump. May came in higher than the median projection for a 0.1 percent increase. By major components, energy still gained, by 1.5 percent after a 2.5 percent gain in April. Specifically, gasoline increased 2.7 percent, after jumping 3.6 percent in April. However, food fell 1.4 percent, following a 0.3 percent rebound the month before. At the core level, PPI growth eased to 0.2 percent after a 0.3 percent rise in April and equaling the median forecast for 0.2 percent.

Retail Sales in May are reported as falling .2%. This is also a sharp deceleration from April’s prior supposed .5% gain. Since I know this report vastly overstates real retail sales, I take a negative print here to mean that sales are really decelerating. Remember, this report does not correct for real inflation, and it also suffers from survivor bias. Here’s Econoday, note that gasoline sales increased solely due to the rising price of gasoline – that does NOT equal more products sold, it equals more money printed. Also note the downward revision for April… again:

HighlightsHeadline retail sales slipped in May, tugged down largely by auto sales and with other components mixed. Overall retail sales in May dipped 0.2 percent, following a revised 0.3 percent gain in April (originally up 0.5 percent). May's decline was less negative than the median forecast for a 0.3 percent decrease. Excluding autos, sales advanced 0.3 percent, following a 0.5 percent rise in April. The consensus called for a 0.3 percent increase. Gasoline sales gained but only moderately. Sales excluding autos and gasoline in May printed at a 0.3 percent rise, matching the increase the month before. Overall, the trend is upward but at a modest pace the last two months following strong months in March and February.

The market is in a dangerous position from my point of view. The hot money players I’m sure will try to engineer a bounce, justified or not by economic data. Remember that bubbles require fuel for the fire, so we need to see where the fuel is, not just assume that it’ll be coming immediately. The market is all fluff, so removing or even slowing the flow of hot money will allow the deflationary forces to take over.

Another point for caution here is that yesterday the market was flat to slightly higher, yet the VIX rose and jumped over the 200 day moving average: